LyondellBasell Industries

LyondellBasell is one of the world’s largest chemical and plastics companies.

Why I Would Buy

1.       Cheap – LyondellBassell’s stock is currently selling for < 9x forward earnings.

2.      Strong Returns on Equity – As visitors to this site know RoE is my favorite metric for evaluating stocks. LYB has delivered an eye-popping 50% returns on equity during the  past 5 years!  

3.       Low Payout Ratio – The dividend is a respectable 3%, with a payout ratio below 30%.

4.      Good Credit Ratings – Long term debt of the company is rated investment grade by all three rating agencies.

What Could Go Wrong

1.       High COGS (Cost of Goods Sold) – LyondellBassell  has incredibly high COGS, approaching80% of revenue. Even small increases in cost of raw materials will significantly eat into profits.  

 Disclosure: I am long LYB, please read additional disclosures here before taking any action based on this post.

WH-Group

WH Group

Ticker: WHGLY, Buy below $15.

WH Group is the largest pork company in the world — with holdings in China, U.S. and Europe.

Why I Would Buy

1.       Cheap – WH’s stock is currently selling for < 10x forward earnings.

2.      Market Dominance – WH group has near global monopoly in pork production, processing and packaging; the rest of the market is highly fragmented and does not possess a comparable scale of operation.  

3.      Opportunistic Buy – The stock is buffeted by multiple factors: the trade war, and pork disease in China. Both these have already been priced in, a snap back is likely in the medium-to-long term.

4.       Low Payout Ratio – The dividend is a respectable 4%, with a payout ratio below 30%.

5.      Good Credit Ratings – Long term debt of the company is rated investment grade by all three rating agencies.

What Could Go Wrong

1.      Chinese Company – Potential for poor accounting and governance standards, government intervention, and questionable shareholder rights etc.

2.      Trade War – The company imports significant volume of Pork from the US and is directly in the crosshairs of the tariffs.

Disclosure: I am long WHGLY, please read additional disclosures here before taking any action based on this post.

Lincoln National

Ticker: LNC, Buy below $66.

Lincoln National is a Fortune 250 American holding company, which operates multiple insurance and investment management businesses.

Why I Would Buy

  1. Cheap – LNC is currently selling for > 8x trailing earnings and forward earnings.
  2. Below Book – The stock can be purchased below it’s book value (P/B: 0.93).
  3. Return on Equity – RoE has been at a high single digit level for the past decade.
  4. Low Payout Ratio – The dividend is a respectable 2%, but a payout ratio below 20% affords plenty of opportunity for future dividend growth.
  5. Strong Buyback – Management has announced an aggressive share buyback program, which is likely to be accretive to shareholders given the low valuations of the stock.

What Could Go Wrong

  1. Credit Rating – Long term debt of LNC is rated BBB+ by S&P, I would’ve liked higher ratings.
  2. RoE – Although decent, consistent double digit returns would’ve made the stock more attractive
  3. Relative Valuation – Not particularly cheap when compared to other large life insurers.

 

Disclosure: I am long LNC, please read additional disclosures here before taking any action based on this post.

 

Scotia Bank

Ticker: BNS, Buy below $60.

Bank of Nova Scotia is a major Canadian multinational bank.

Why I Would Buy

  1. Cheap – BNS is currently selling for 11x trailing earnings and 10x forward earnings.
  2. Dividend – Pays a 4+% dividend, while maintaining a payout ratio below 50%.
  3. Return on Equity – RoE has been consistently at high teens for the past decade.
  4. High Credit Ratings – Strong investment grade credit ratings on long term debt (A+ by S&P). I like strong long term debt ratings, as it is an indicator of the longevity and sustainability of earnings.
  5. Geographically Diversified – in addition to Canada, the bank has significant revenue streams emanating from Caribbean and Latin American countries.

What Could Go Wrong

  1. Recent Stock Issuance – BNS issued a large amount of stock recently to fund an acquisition, it may or not be accretive.
  2. Trade War – Looming trade war could hurt emerging markets that BNS is exposed to.
  3. Relative Valuation – Not particularly cheap when compared to other large banks e.g. JPM.

WPP PLC

Ticker: WPP, Buy below $90.

WPP is a multinational advertising and public relations company based out of London.

Why I Would Buy

  1. Cheap – WPP is currently selling for < 10x earnings.
  2. Dividend – Pays close to 5%, while maintaining a payout ratio hovering around 40%.
  3. Return on Equity – RoE has been above 10% for past decade, and above 15% for past 3 years.
  4. Beaten Down – Beaten down due to uncertainties surrounding the departure of the founder-CEO, and also due to several major accounts coming up for renewal this year.
  5. Globally Diversifiedhas significant revenue streams emanating from every major and developing economy around the world.

What Could Go Wrong

  1. Account Renewals – Several large global accounts are up for renewal this year, just lost one of these (HSBC). If several others are lost, will hurt revenues grievously.
  2. Debt – Several large recent acquisitions were financed via debt, if revenues taper due to any reason; it could snowball into a major problem.
  3. High Beta – Advertising and media spend are strongly correlated to global economy, and is first spending to be cut in a downturn.

Disclosure: I am long WPP, please read additional disclosures here before taking any action based on this post.